The issue of prescription drug prices continues to top the list of public concerns about health costs, and Congress and the administration are floating possible policy solutions.

Solutions to this complex problem will be most effective if they are targeted and geared toward encouraging rather than undermining competition and innovation in the vibrant 21st century life sciences industry.

One segment of the industry that has great potential for savings and where public policy decisions can have a major impact is in the fledgling market for “biosimilars.” They are part of a new class of biological medicines created in the laboratory but derived from living organisms. They offer enormous promise in treating and even curing disease by locking into the body’s own biological processes to treat cancer, diabetes, rheumatoid arthritis, and other diseases. By the year 2025, more than 70% of new drug approvals are expected to be biological products.

When the patent runs out for the original biological drug, a drug developer can create an imitator drug, called a biosimilar, designed to serve the same function. Health plans, employers, and publicly-financed health programs all have been awaiting the advent of biosimilars because they could produce discounts of 20-40% from the cost of the original innovator drug.

A RAND Corporation analysis estimates that biosimilar drugs could reduce spending on biologics in the United States by $44 billion over the next decade. The Congressional Budget Office estimates more conservatively that biosimilar medications could generate $25 billion in savings for patients and taxpayers over 10 years.

Biosimilars are designed to imitate the therapeutic effect of biologics, but they are not like small-molecule chemical drugs, which can be stamped out in exact generic copies. Because biosimilars are produced in living cells, they can never be exact copies of the original. And because these products are unique, Congress created a special pathway in 2010 for the Food and Drug Administration (FDA) to approve biosimilars.

So far, only five biosimilars have been approved in the U.S., compared to 30 in Europe. Because the market is just getting started in the U.S., it’s very important to get the policy right.

But a rule finalized in 2015 under the Obama administration threatens to cripple this industry and impede the vibrant competition needed to encourage companies to develop new biosimilars and produce the competition necessary to achieve the expected savings.

The Obama administration’s Centers for Medicare and Medicaid Services (CMS) decided in its rule how Medicare will pay for biosimilars—a rule that directly violated congressional direction.

CMS decided that all biosimilars referencing the therapeutic effect of the original biologic should get the same payment reimbursement, irrespective of their unique qualities. That’s like saying everyone should pay the same price for an SUV, no matter how many features the van may have.

In slapping a form of price controls on this newly-emerging market, CMS is treating these living-organism-biosimilars as if they were small-molecule-chemical pharmaceuticals. Biosimilars do not fit into this bureaucratic box. They can’t be stamped out in mass quantities, copying the chemical formulation of the original. Each biosimilar is unique.

The CMS “reference pricing” policy will have the effect of drying up competition and that means patients have fewer choices of new medicines. Producers in the market will have less incentive to negotiate on prices or even develop new biosimilars in the first place.

Congress wanted Medicare payment policies to support a competitive market and instructed CMS to appropriately reflect the complexity of these products and the differences between individual biosimilar products. It instructed CMS to develop a unique payment rate and code for each biosimilar product. CMS defied Congress in ruling that all biosimilars referencing the originator drug would get the same reimbursement.

Nine senators and 52 members of the House wrote to CMS last month urging the Trump administration to “reconcile the final payment rule to provide each biosimilar with a unique code as it is instructed to do in current statute.”

A study by the Biosimilars Forum says that having “a single, blended Medicare reimbursement rate for biosimilars…is a striking contradiction to the complexity associated with” these new medicines. According to the report, giving each new biosimilar its own code could increase savings by $6.3 billion—or 25% more than the CBO’s conservative estimate of $25 billion in savings over ten years. These savings would accrue to Medicare beneficiaries, taxpayers, and eventually to private payers and Medicaid, which often mirror Medicare payment policies.

A second public policy change is needed to protect Medicare beneficiaries from having to pay higher costs for biosimilars.

Nearly 41 million Medicare beneficiaries receive drug coverage through Medicare Part D. Because of the structure of the original Part D law passed in 2003, seniors faced a coverage gap where they could be required to pay the full cost of drugs. The Affordable Care Act created a Coverage Gap Discount Program through which manufacturers are required to provide a 50% discount on brand-name drugs dispensed to seniors in this gap.

But under the law, there is a statutory prohibition for biosimilar manufacturers to provide discounts in the coverage gap. As a result, seniors are exposed to much higher out-of-pocket costs if their doctor prescribes a biosimilar.

Because seniors can face much higher co-payments for biosimilars since discounts are not allowed in the coverage gap, physicians have an incentive to prescribe the usually higher-priced innovator drug rather than the biosimilar substitute for their Medicare patients. (Biosimilars are complex molecules that almost always are administered in physicians’ offices and hospitals.)

A study by Avalere health found that this policy distortion will lead to increased costs. “It is unlikely that the intent of the ACA was to increase cost sharing for patients using biosimilar products,” the study says. “However, because of the structure of the Part D program, Medicare beneficiaries may be subject to significantly higher out-of-pocket costs when taking biosimilars compared to their reference products.” Avalere estimates that requiring biosimilar manufacturers to provide discounts to seniors in the donut hole could reduce federal spending by $800 million over 10 years.

The result is that fewer patients will start or transition to treatment on biosimilars, depriving them and government payers of the potential savings, and reducing the incentive for new companies to enter the market and generate competition.

Avalere concludes that “Changing the statutory language to direct manufactures to pay 50% of drug costs in the coverage gap would result in lower out-of-pocket costs for patients, as well as additional savings to the federal government.” Allowing biosimilar manufacturers to fill in the donut hole would likely result in Medicare savings and allow biosimilar manufacturers to complete on a level playing field.

A third policy proposal would prohibit biosimilars manufacturers from gaming the Medicare rules at launch. Right now, biosimilar manufacturers are able to thread their way through Medicare’s complex web of payment rules to price their products in such a way that the biosimilar—which cost a faction of the amount the innovator company spent in developing the drug—can be reimbursed at launch at a higher rate than the innovator product.

This flies in the face of the promise of savings from biosimilars. The innovator drug cost an average of $2.6 billion and 12 years to develop; biosimilars can come to market in an average of six years at a cost of $250 million. But because of Medicare’s complex payment rules, Medicare reimbursement for a biosimilar may be higher than for the original drug. For example, drug developer Coherus has indicated it plans to price its biosimilar at launch 15% below the innovator’s price for Neulasta, but after the Medicare reimbursement formulas are calculated, the Coherus biosimilar would be 22% more expensive.

Congress and the administration will surely be watching these pricing strategies to adjust payment policies to achieve the promised savings from biosimilars.

There are sensible market-driven solutions that will help biosimilars to live up to their potential for savings to consumers, to taxpayers, and help produce a vibrant and competitive market for this promising new class of medicines. These ideas can be part of a much longer list of targeted policy solutions from Congress and the administration to drive greater value in the health sector.